Q3 2019 Earnings Call
Good morning, and welcome to the Mega Health care investors third quarter 2019 earnings Conference call. All participants will be in listen only mode. So you need assistance. Please signal conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions to ask the question. You May Press Star then one on your touched.
On phone to withdraw your question. Please press Star then too. Please note that this event is being recorded I will now it to turn the conference over to Michelle Reiber. Please go ahead.
Thank you good morning.
Me today or make a CEO Taylor Pickett CFO , Bob Stephenson C O damn do and she's corporate development Officer, Stephen It's all comments made during this conference call that are not historical facts, maybe forward looking statements such as statements regarding our financial projections dividend policy portfolio restructuring rent payments.
Financial condition or prospects of our operators contemplated acquisitions dispositions or transitions and our business. Some portfolio about will generally these forward looking statements involve risks and uncertainties, which may cause actual results to differ materially. Please see our press releases in our filings with the Securities Exchange Commission, including without.
Limitation, our most recent report on Form 10-K , which identified specific factors that may cause actual results or events could differ materially from those described in forward looking statements. During the call today, we will refer to some non-GAAP financial measures such as Oh, adjusted EPS I saw that an EBITDA.
Conciliations of these non-GAAP measures for the most comparable measure under generally accepted accounting principles as well as an explanation of usefulness of the non-GAAP measures are below the one of the financial information section of our website at Www Dot Omega health care Dot com and in the case of Apple phone adjusted FFO in our recently issued press release.
I'll now turn the call over to Taylor.
Thanks, Michelle good morning, and thank you for joining our third quarter 2019 earnings conference call.
Today, I will discuss our third quarter results, our recent acquisition activity fabric and the current reimbursement environment.
Our third quarter adjusted up a thought it was 76 that's for sure we declared a 67 cents per share dividend for the core.
Yeah ratios, 88% just stuff, so 97% funds available for distribution.
Well, one penny increasing our dividend reflects both known earnings upsides, namely the recently closed $735 million Encore transaction and the 2020 opening of making what's new Manhattan facility.
Our optimism around continued growth opportunities and improvement in cash rents or rent equivalents from the DAYBREAK facilities.
Future potential dividend increases will be evaluated periodically by our board of directors will be partially dependent on achieving both known earnings upsides and additional growth opportunities.
On October 31st we closed our previously announced encore portfolio acquisition for $735 million. In addition, during the third quarter. We Opportunistically sold 19 facilities for $177 million recognized related gain a $53.1 billion.
We continue to work with DAYBREAK as Dan will the tail DAYBREAK near term liquidity issues, which resulted in the payment of only $750000 a third quarter Rep. We expect these liquidity issues will be resolved over time and anticipate significant future DAYBREAK rent upside as we work through the near term Dave.
Restructuring issues.
Lastly on the reimbursement front.
Operator feedback related to PDP on the new patient driven payment model has been positive.
It is still too early to know the financial impact of Pdps.
We will provide investors with more information details unfold.
I'll now turn the call over to Bob.
Thank you Taylor and good morning.
<unk> portable with that so when a dilutive paces was $163 million or 72 cents per share for the quarter as compared to $161 million or 76 cents per diluted share for the third quarter of 2018.
Our adjusted F., though was $173 million or 76 cents per share for the quarter and excludes several items as outlined in our adjusted FFO reconciliation to net income found in our earnings release in our supplemental and on our website.
Operating revenue for the quarter was approximately $233 million versus $222 million for third quarter of 2018. The increase was primarily a result of incremental revenue from a combination of over $800 million on new investments completed the capital renovations made to our facilities since the third quarter up 2018.
Well as lease amendments made during that same time period.
Revenue from former Oriana facilities that were transferred to existing Omega operator in the third and fourth quarter of 2018, and finally, we adopted the new lease accounting standard effective January Onest 2019, which resulted in a recording of kind of real estate taxes and ground lease income in Rabbit Hill.
The increase in revenue was partially offset by reduced revenue related to asset sales transitioned and loan repayments that have occurred throughout 2019.
Timing of cash receipts related to operators on a cash basis and finally based on the interpretation of the Collectability guidance in the new lease accounting standard requiring to write off for straight line receivables for operators want to cash basis, we recorded approximately $3 million for non collectible revenue related to two operators during the quarter.
$233 million a revenue for the quarter includes approximately $15 million of non cash revenue.
Our GNS expense was $10.8 million for the third quarter of 2019 and included $600000 and restructuring charges, primarily related to the early buyout of or Chicago office lease, which had a 2000 at 24 termination you may recall that we closed our Chicago office in the first quarter of 2019.
Interest expense for the quarter, when excluding noncash deferred financing cost was $50 million with a 2 million dollar increase over third quarter of 2018, resulting from higher outstanding borrowings for the quarter.
Our balance sheet remains strong and continues to improve in September we entered into an equity forward sale agreement to sell 7.5 million shares of common stock in connection with a 300 million dollar underwritten public offering.
Expect to settle the forward equity sale agreement by the end of 2019.
Net proceeds from the settlement or the forward sale agreement will be used to repay a portion of the debt borrowed to finance the encore portfolio acquisition.
Also in September we issued $500 million a free of five 8% senior notes due October 2029, net proceeds from the offering were used to repay a portion of our outstanding borrowings under our revolving credit facility and term loans.
At September Thirtyth, approximately 90% of EUR $4.7 billion in debt was sick and our net funded debt to adjusted annualized EBITDA was 5.14 times are fixed charge coverage ratio was 4.1 times.
It's important to note EBITDA. These calculations has no revenue related to construction in process associated with our five new build scheduled to become operational within the next 12 months.
When adjusting to include a full quarter of contractual revenue when our new builds and eliminate revenue related to assets sold during the quarter or pro forma leverage will be roughly five times.
Regarding some modeling purposes, we're assuming the following.
On the encore portfolio. The acquisition was completed on October 31st and as a result, we expect record approximately two months of revenue in the fourth quarter or $10.5 million in cash rent.
We also assumed $389 million in HUD debt at a blended rate of 3.66% as part of the acquisition.
We assume the UK investment should close late in the fourth quarter.
We assume new construction projects, we put into service in accordance with our schedule on page seven of our supplemental information posted to our web site.
We assume revenue from the DAYBREAK portfolio will continue to be recorded on a cash spaces with rent from that portfolio generating $4 million to $5 million per quarter in late 2020.
We assume noncash quarterly revenue should be between 16 and $18 million per quarter.
We project DNA of $9 million to $10 million per quarter.
Noncash stock based compensation expense is estimated to be approximately $4 million per quarter.
The variability in our interest expense is primarily driven by borrowings on our revolving credit and term loan facilities as well as LIBOR rates.
September thirtyth, 10% of our debt or $500 million was floating rate debt.
We recorded $2.8 million of revenue related to assets sold during the third quarter, although not included in guidance additional asset disposition opportunities may occur.
Regarding share issuances. In addition to the 7.5 million share forward sale agreement, which we expect to settle by yearend, we assume it will be issuing approximately $25 million of equity per quarter or dividend reinvestment in common stock purchase plan consistent with our recent quarterly issuances lastly, based on our stock price and subject to equity.
Market conditions, we may decide to issue additional equity under our ATM to continue to de lever and from potential acquisitions.
During the first nine months of 2019, we issued or sold approximately 5.6 million shares of Omega common stock generating over $200 million gross proceeds through a combination of our ATM and our dividend reinvestment of common stock purchase plan.
I'll now turn to call over to Dan.
Thanks, Bob and good morning, everyone.
As of September Thirtyth, 2090, Omega had an operating asset portfolio of 910 facilities with approximately 91000 operating beds. These facilities were spread across 73 third party operators and located within 39 states in the United Kingdom.
Trailing 12 months, operator, EBITDARM and EBITDAR coverage for our core portfolio. During the second quarter of 2000, I'd was 1.66, and 1.3 times, respectively versus 1.67 to 1.31 times, respectively for the trailing 12 month period ended March 31st 2090.
Turning to portfolio matters during the third quarter of 2019 fabrics the quarterly changes in operational performance deteriorated further as a result in reduced overall occupancy.
Often quality mix ongoing labor pressures insignificant legacy operating costs, because she much of day Briggs current run rate.
As a result, the mega recognise less than $1 million anyway, so the third quarter.
Well they pick is expected to benefit from the addition of 26 Omega facilities into the Texas QIP program implementation of PDP, EM and the 2.4% Medicare rate increase the vast majority of these benefits not assist you fabrics liquidity challenges until the first quarter 2020.
The combination of these factors as resulted in DAYBREAK into making a consensual. We agreed can begin to selectively downsized state breaks wide geographic footprint across the state of Texas, allowing day break the more narrowly focused attention on only a few select markets.
Accordingly during the third quarter of 2019 Omega began to have discussions with several other Texas based operators about releasing a number of facilities that fall outside the bricks desired poor geographic footprint.
Both the discussions and the downsizing process or ongoing.
Well the ultimate outcome of this process is difficult to ascertain at this time, we feel confident that a big will eventually end up with rent were rent equivalence between $15 million to $20 million per annum on our current DAYBREAK portfolio.
Turning to new investments.
July 1st 2019.
Mega completed a $25 million purchased lease transaction for three skilled nursing facilities in North Carolina and Virginia.
Facilities were added to existing operators master lease for an initial cash yield of nine have person it 2% annual escalators.
Turning to subsequent events.
Mentioned by Taylor on October 31st 2019, Omega closed on our previously announced 735 million dollar acquisition of 60 facilities. The purchase consisted of approximately $346 million of cash and the assumption of approximately $389 million odd mortgage loans.
The portfolio consists of 58 skilled nursing facilities into assisted living facilities located across eight states with a significant concentration in the southeast.
So these are leased to two operators one being existing Omega operator, we are three triple net master leases.
So these will generate approximately 64 million in initial cash rent with annual escalators, ranging from 2.25 to two and a half person.
Year to date Omega has made new investments totaling approximately $1.5 billion, including capital expenditures.
Also as mentioned earlier on October 29, 2090, Omega entered into a share purchase agreement to acquire healthy properties, 49% interest in an existing joint venture with Cindat capital management Bertone equity investment of approximately $90 million.
The portfolio consist of 67 own care homes across the United Kingdom leased a two operators via three separate tripping that master leases in a single facility development loan with a third party bar.
Transaction is expected to close by yearend.
Turning to dispositions during the third quarter 2019, and make it divested 19 facilities via six separate transactions for total proceeds of approximately $177 million.
Lastly, as of today I'll make it has approximately $995 million of combined cash revolver availability to fund future investments and capital expenditures.
And we'll now turn the call over to Steven.
Thanks, Dan and thanks to everyone on the line for joining today in conjunction with Maplewood Senior living we continue work on our AOL memory care high rise. It second Avenue in 90 Threerd Street in Manhattan. The project is expected to cost approximately $285 million, including accrued rent and is scheduled to open in early 2020.
Including the land and see IP of our New York City project at the end of the third quarter Omega Senior housing portfolio totaled $1.5 billion of investment on our balance sheet.
Anchored by our growing relationship with Maplewood senior living in their best in class properties as well as health care homes in gold care in the UK. Our overall senior housing investment now comprises 125 assisted living independent living in memory care assets in the U.S. and UK on a standalone basis to core portfolio not only covers its lease obligations at 1.2 times.
But also represents one of the larger senior housing portfolios amongst the publicly listed healthcare Reits.
Our ability to successfully continue to grow this important component of our portfolio as highlighted by our 15 maplewood facilities, including the newly opened 98 unit. He left in South Port, Connecticut, as well as the related pipeline is predicated on coupling our tenants operating capabilities with our commitment to having in house design and construction expertise through the same capable.
We invested $38 million in the third quarter in new construction in strategic reinvestment 19.8 million of this investment is predominantly related to our active construction projects with a total budget of approximately $500 million inclusive of Manhattan. The remaining 17.9 billion of this investment was related to our ongoing portfolio Capex reinvestment.
<unk> I will now turn the call over to tailor for some final comments.
Thanks Steven.
This concludes our prepared comments.
We'll now open the call up for questions.
Thank you well now begin the question answer session to ask a question you May Press Star then one on your Touchtone phone.
Speakerphone, please pick up your handset before passing the keys to withdraw your question. Please press Star then to at this time, we will pause momentarily to assemble our roster.
And our first question will come from Joshua Dennerlein of Bank of America Merrill Lynch. Please go ahead.
Hey, good morning, guys I'm, just curious on the UK JV that you have bought into.
Why did you decide to pursue that acquisition it and do you have any color on cap rates and then how does the JV partnership or is there an opportunity for you eventually to kind of consolidate the whole portfolio.
Yes, Hey, listen we've been opportunistic in the UK, we were still very bullish on it. So we're always kind of looking for new opportunities there.
We have to existing operators that we do business with this opportunity will add to more.
I think diversity is a good thing.
The demographics over there right there are quality operators, and we think weve matched up with them.
Cap rates are.
We look at care homes over the UK much more like assisted living here in the United States on cap rates are lower than your average snaps you know there you're looking at seven.
Rather than eights, and nines and that that holds for the steel as well.
And then in the future I captured all your questions.
There is an opportunity to.
To potentially.
In one the JV I mean, we have.
We're in a JV structure right now, we're basically a tough 51 49.
Everybody has shown a mutual owning rights.
You know I think our strategy in the UK long term I can't speak to my partner, but we're still bullish in UK and you know the opportunity.
We we would probably buy out the other piece.
Okay, great. Thank you and then maybe just one question on DAYBREAK I'm not sure if I I heard it did.
How much renter, you, including and guidance for Fourq you from DAYBREAK is a threeq you a good run rate.
Yes, so as you know it and we said Dave breaks on cash basis Im Okay.
So.
We assume it's in that.
We have a range of guy. So we had 750, the third quarter and our guidance is an average.
Okay. Thanks for your before.
And our next question will come from Jonathan Hughes of Raymond James. Please go ahead.
Hey, good morning, I'm, just going back to DAYBREAK have they paid October rent in line with.
With the three 5 million you're projecting.
I'm little confused I know that three to five knowing that we're projecting is not.
In the fourth quarter, that's what I found a.
Our ways that factor I.
A number of different things are being recognized some of things that I talked about.
PDP enrolling in.
The Texas with properties Medicare rate increases and then.
Got a number of legacy costs, which are.
Oh, promissory notes or vendor notes et cetera that.
Roll off in the coming Matson and throughout 2020, so when you put all that together and that's a pretty big economic pickup it's about.
A 9 million in revenue enhancements and about.
Two plus million dollars in legacy costs running now.
And then as I alluded to we've got some some transitions in the work so.
That's not quite as quantifiable, that's really more narrowing Dave Ricks focus on a single geographic market are really up to geographic markets, which.
We'll be able to focus their attention a little bit more and then taken some of these outlier facilities and went really they're spread across.
Entire state of Texas.
From the northern.
Tempted to southern and and east West as well, so we're going to be able to.
Our attention and then parse out some of these other outliers to operators that.
There are more focused are concentrated in those other market. So I think the combination of what is quantifiable and one is not quantifiable.
Where we get to this.
You know three to 515 to 20.
Right and that through their.
Hi between here and there.
Okay and that three to five is essentially for Fourq, you 20 quarterly run rate right.
That's a good way to look at it.
Okay.
Looking at the the shift in coverage distribution.
I'm not surprised me a bit given the sequential increase in occupancy was that driven by a few large operators on the French or maybe the impact of the met equities portfolio rolling in there.
No equity it was pretty flat actually maybe a slight pickup but.
Given our scale was didnt have any impact it was really to operators that.
[laughter] over from one bucket to another.
We think it's temporary but.
It's hard to predict but yet you're exactly right. It was two of our top 10 offers at one from the.
From a higher bucket down into the lower.
Well they move for those two operators to me. It was it like 0.05 turns are we talking kind of like a rounding error.
Oh, one was a rounding one was a little bit more significant more of a point point of 5.6 I like that.
Okay.
And then last one I know it is too early to tell.
Fully on the impact the PDP on but has that altered your underwriting process for snaps, meaning you know as you look further out in the horizon are you underwriting sniffs using maybe overly conservative assumptions you know in case, there's some kind of reimbursement rate cut in the future.
They did in 2011, if overall margins began to significantly improve in CMS looks it kind of recover some costs would love to hear your thoughts on how that's impacting how you look at properties.
So I don't think we're not going to really CPT P.M. roll through our numbers you know one full force until I would suggest the first quarter.
And well it's expected to have an impact I don't see us materially changing our underwriting we're not sure where CMS will head with this or were.
<unk> reimbursements will go but if it looks after several quarters that there's a pdps leveled out and on the operators are.
Our happy enough. The results are consistent then yes, I think that won't be ultimately built into our underwriting.
But that's got a that's not turn off of a switch.
Right. I mean is have you seen any more sellers come to you I know a lot of your deals or relationship driven just curious since as a cadence of the extra pipeline, how that's trended over the past few months.
As always it's choppy and we're sort of getting into that part of the season, where in of the I'm the opportunity slow down a little bit until the first quarter.
Okay.
All right I'll jump off thanks for the time.
And our next question will come from TRID Trujillo of Scotia Bank. Please go ahead.
Hey, good morning, everyone. So following up on one of a jonathan's questions about the EBITDAR coverage distribution I just want to clarify something so part of that dropped down from <unk> into the one to one to bucket was from a large operator with a pretty sizeable down.
Tick.
My understanding or what I think anyway, maybe you can shed some light on this is that was perhaps signature because it was early to transitioning to P. D. P. M. But also my understanding is that happened in like over the summer. So it wouldn't be reflected in these stats shown in your supplemental as of June Thirtyth. So maybe.
Can you give a little bit more context as to why there was such a drop in a in the covered stratification.
Well I don't think there was that materially of drop yeah, we actually had two operators.
That fell from the one to one a pocket into the ones a one to bucket.
[laughter], but once again the drop offs were not.
That material.
Some of it was in fact I'm sure that the prep for PDP I'm in a.
I think systems and education in place for that to come on October one.
So some of it we think.
We'll we'll see come back form of home you know when when PDP upticks picks on October one we start to see those results.
I would not describing to define it as a material drop off from any one of those two operator.
Okay, maybe maybe rephrase not a little bit then so there was 70 million roughly 70 million that dropped from a higher bucket to a lower bucket and if if there was no material decline.
You would expect that the weighted average cartridge wouldn't really move much or even actually improved from the prior quarter, but the weighted average coverage actually went down which would imply that it was a pretty big shift. So again, if there's any sort of color you can provide on that it would be helpful. Because they just in person.
Effective this 23.5% from the one to one to bucket is now reminiscent of a couple of years ago. Before you started having operator issues I don't want when sand you wait there operator issues, maybe it's a onetime thing with these operators and it could bounce back, but just some more color would be helpful. Thanks.
Yeah, I mean I'd have to look at the weighted average to be honest with you dig into that before I could respond anymore with any more clarity that already have.
As I indicated once again, it's sort of two operators that drop from one bucket to the other wasn't material, but I'll look at the.
I'll focus on look at the weighted average as well okay. Appreciate that maybe we'll out we'll follow up later, but I guess switching topics to the or to the encore portfolio a it looks like a with consulate set to come in is that the majority operator, they're gonna be a talk to were top three operator can you maybe talk about your relationship.
With them, how that's evolved overtime and a your comfort level with them being a topic operator and are you seeing a further growth opportunities given prior comments about favoring gross in the southeast region.
So yeah consulate will ultimately end up being well has become our number to operate or actually.
I don't see any growth opportunities today, but we'll certainly certainly talk with them I think our relationship with their management team is excellent we have frequent conversations with them. We they are in markets that.
You know that that we carve it up at the early the southeast you know they have gone from BNN over 20 states down to I think aimed at this point so.
They've done a good job narrowing their geographic footprint and really honed in on on where they where they want to operate going forward they've done a lot to rein in their costs.
Theres a lot to like about consulate, we do think that their quality, operator, and an extent the we have opportunities to do stuff with them in the future. We will certainly look at that long and art.
Okay and last one for me or the other operator in the deal it sounds like it's a relatively smaller one maybe a newer one and definitely new to your portfolio as you put in the prepared remarks, what are your plans a in terms of growth with that relationship over time.
So they are new operator, you know represents three facilities and that's transaction, we have met with them previously and we will continue to talk with them and if they're already new opportunities, we we'd like to expand with them. We think there a quality operators as well.
Okay.
Thank you appreciate the time.
Our next question will come from Ted than a core of Stifel. Please go ahead.
All right good morning, all.
Hi, Jeff.
All right could you talk a little bit more about the UK investment they bought from HCP. So.
Well, we don't know is how how does performance of the underlying property has trended over the past year, you give us some lease terms in coverage ratio.
And then.
What is ultimately your target allocation or you expected growth in that UK market.
The the coverage in the performance of those facilities has been pretty flat actually one portfolios ticked up the other stayed flat so were you.
From the time that we first looked at it and looking back historically.
Portfolio has improved.
You know, it's it's north of it you know it's not an army because it's really is assisted living so slightly below that but it's.
Inline with what our assisted living living coverage looks like today.
And then.
You know how big can we get in the UK I think we're just going to continue to be opportunistic. We've got we will have for operators. There are they will be.
I think aggressive on the acquisition side. So we'll have I think some a more opportunities to do some more deals over there.
Well, we don't we haven't picked up.
Target, where we want to end up at the end of the that.
Okay, and then this one's probably for Steve which is a second Avenue development in Manhattan that opens up in the first quarter or at least should can you give us update on development leasing activity and then expected stabilization date at this point any surprises either positive positive or negative to this point.
So Lisa or I should say deposit deposits are going sort of according to plan.
Operator would sort of like to see the deposit level preopening on the date of opening.
Shouldn't be in the 30% to 40% of unit count.
In there.
Consistent with what they're suburban operation just shown over the years and it's on track now to do that I would think about full stabilization in 24 plus months and you have to the extent you had asked about surprises actually it's sort of going according to plan HM No no no wild swings either what mark.
In our aseptic product really well.
So take no changes on rent expectations at this point.
No no okay.
And then.
It's.
Yeah on the debt side of things that it's probably more geared toward Bob you Didnt about 10 year Fiat 500 million dollar senior note at a three and five eight since September which was pretty attractive to given where average long term debt costs are you know any chance to refinance the more they existing nodes that carry a higher interest rate at this point.
Can we look at that all the time and we will be opportunistic if the make whole make sense to us and given the spread or on the tenure, but we do analyze it all the time.
All right that's it for me thanks.
Sure.
[noise] and the next question will come from [noise].
Lukas Hartwich of Green Street Advisors. Please go ahead.
Can you guys talked a bit about skilled mix trends over the past few quarters.
Yeah, I mean that trend has come under pressure I mean that mix the quality mix trend has come under pressure I mean <unk>.
Still has I mean lengths of stay or.
No there's still trending down although [noise] downward trend has slowed up quite a bit.
We're still seeing them hospitals hold on a patients longer in the length of stay in steps to be shorter.
It hasn't fallen off much flooded.
There is slow slow decline if you look at it over the past four quarters.
Right, but one of those [laughter] one other thing I'd add Lucas.
We've seen Medicaid tick Oh, it's an environment, where with occupancy where it is.
Our providers are taking all available patients not a selection.
Situation, except for maybe a very.
Very high occupancy parts of California, but around the country or you're not having operators say no I want this patient versus that I think the movement in Medicaid upward is the beginning of the demographic analysis that Weve dawn talked about over the last year and Uh huh.
Yes, that's.
Situation, where our residents really don't have other options in terms of settings is completely needs driven theres no way stays around that I think what you're seeing on the Medicaid side at the beginning of that demographics.
We're seeing on the Medicare side, it's just not obvious because of the length of stay pressure and as Dan mentioned that pressures abating, but still out there.
That's helpful. And then you kind of touched on this earlier, but your your New York development is nearing completion I'm. Just curious if you have any updated thoughts on similar projects that you could start a over the next few quarters.
Oh, the making what team is incredibly active yeah.
Looking for opportunities and were very supportive of that the lead times on these sort of things are our law I will say, we continue to be actively looking for the next big opportunity in the meantime, [noise], we continue to find opportunities for their suburban product.
Which is there they tend to be a fit for a six of the size of second Avenue Carnegie Hill.
But there's still quite additive.
We're finding those as well.
Great. Thank you.
Thank you.
Our next question will come from Daniel Bernstein of capital one. Please go ahead.
I was on mute good morning.
I guess my question right now is maybe more about the pipeline a you just did some large portfolio transactions Ah <unk>, what's the outlook for kind of the bread and butter ward off to off assets, you know, where you can do two or $300 million year, and then maybe in that context talk about.
Opportunities to expand relationships, but new operators.
Somebody largest operators started office, it's more smaller operators for you and just want to trying to cut understand what the opportunities are there I'm on the small shop.
So.
To your point, the bread and butter, which tends to generate 300 million plus per year.
He is out there and it's consistent and I would expect that just continue to roll forward into 2020 on the operator side as you know Dan we've we've skinny down our number of operators, but.
We actually add two or three new relationships every year.
And it's interesting.
We really haven't.
Talked about this lot, but if you look at some of those relationships. We've added over the last few years, they've all tended to grow with us. So we continue to look for the next generation of growth opportunities and I think we'll find it at a mark market that continues to have a to be opportunistic and good operators are hard to find when.
To find them you want to invest and now the only other comment I'd make about pipeline is.
The conditions, we talked about over the last year that provide opportunities for the bigger type deals are still there.
We found a couple last year.
I wouldn't.
The same market conditions exist today, we don't have anything and pipeline today, but.
Still feels like a market, where we might see those type of transactions as well.
Yeah. So it's a two to 300 million of what often.
Probably one 500 million to a billion dollar deals kind of the way to think about [laughter].
[laughter].
The other question why has it.
It's very preliminary on the PD P.M., but.
Where there have you operate he's talked about any surprises whether good or bad in their transition to PDP.
I haven't heard anything bad.
Which is is really and we would've by now so I think the coding.
The revenue cycle I don't know that we've got feedback on that but in terms of coating and expectations around that that's all been positive.
I think the adjustment of rehab expenses it really just depends on when you start the process.
We think it's generally a three month process and most of our operators Didnt start.
Well those efficiencies and saw until now.
But.
The chose pega.
Okay.
And then on the operators it slipped in the.
The coverage bucket.
If you can go over maybe kind of what the maybe a safe guards in there in terms of covenants or guarantees and.
So maybe subordination of DNA or something like that it's one to understand what.
Yeah, what the we structure is there a little bit.
Yeah, I mean, it that's listen we've had.
Consistent lease structures now for.
It doesn't plus years I mean, we generally put everything into master leases. There is almost always a secondary source and repayment from either a parent company a management company or individuals on the other subordination of management fees, sometimes there's equity pledges, we get seconds on a are.
They're our financial covenants there are you know.
A number of other things that that protect us some particular interest.
So I think our underwriting has been consistent over many years it hasn't.
Change, we don't expect it to change.
Okay and then one last question yeah. There's.
Potential changeover in Medicaid funding in Michigan, and I think your third largest state or any concerns there.
From your standpoint.
Ah, yes that there could be some negative impacts on.
Your operators in Michigan.
So are we have one obviously large operator in Michigan and what they're doing is lower and the caps and.
The early analysis is that this will be neutral for them.
Okay.
That's all I have thanks.
Okay.
Our next question will come from Todd Stender of Wells Fargo. Please go ahead.
Hi, Thanks, just some quick tenant questions I guess around some of that portfolio changes.
The acquired assets in the quarter. So three snus for 25 million, who are those are going to be lease too.
An existing private operator.
Can you disclose who it is or is it I think it goes into a master leases if I caught that right.
It does but as a rule, we generally don't disclose our private operator.
Got it and then on the sales Ah you sold nine assets for 93 million how about the operators in those.
[noise] non diverse [noise].
Non core strategic operator can we sold.
Yeah, you wanting to move we sold to who worthy operators a in those facilities.
They were sort of one offs within different portfolios. It wasn't one big nine facility deal. It was a bunch of smaller transactions with smaller operators got it. Okay. Thank you are just finally, just looking at Capex.
When it kind of reconcile what to forecast capex year to date about 40 million just as a reminder is that money, that's mostly going towards retenanting facilities.
Just considering you're a triple net owner what is that mostly going towards.
Our Capex Todd is is up.
Incremental.
Additions to buildings typically that has.
So it was very there's almost no capex that is kind of your office type retenanting.
Capex.
My as well call it zero there.
The no maintenance Capex. This is all something revenue enhancing and at a yield comparable that what you're acquiring it.
Correct, that's exactly right okay. Thank you.
Our next question will come from Tayo Okusanya of Mizuho. Please go ahead.
Hi, Good morning, gentlemen, how are you.
Well go back time. Thank you very much I think did it [laughter]. Good to me that I just wanted to follow up on Oh on two questions I would add a little earlier. The first one again has just begun the coverages again to two tenants that did a you know the coverage by buckets moved down a little bit.
Again, given all of due diligence it sounds like one of them one of those kinda into a signature.
And again, just given trends comments earlier on which I agree with about you know signature was one of the first one is to really start to try to implement P. D. P. M early I.
I guess everyone's talking very positively about but PDP M is going to do but is there like a short term negative impact that we should all be bracing for where coverage ratios may actually go down first before ultimately climbing I just I'm just kind of curious if there's some type of shop, we should all be waiting for.
That we may not be thinking about today.
[laughter] honestly, we don't we don't know Hunter for said what the answer to that question is going to be tyo I.
I will say that I don't think we'll see a shock I think you may have certain folks that are we're trying to get in front of PDP.
I would encourage that will incur expenses prior to October though push their coverage is a little bit and some who will have waited my my sense of it is that you won't see coverages moved meaningfully well where for the other.
And we'll get a really good viewing as Dan mentioned Q1, 2020, I will comment that signatures, particularly interesting because.
They have a big rehab program.
That's became much less aggressive in terms of minutes delivered.
And so they're one of the rare cases, where we may see both a reasonably good revenue pick up from PDP.
From just the straight coating and also because rehab still big piece of their overall expenses a decent expense pickup. So there there are no unusual circumstance given that they had the prior.
Disclosed issues with the government.
And really dial back in terms of rehab delivery, which will as you know affect the revenue side of the equation to the positive for them. So signature in particular is one of our tenant relationships. Obviously, we spend a lot of time with that we feel very comfortable rolling into this next year are reimbursed.
Okay. That's helpful. Thank you then the second question is specifically on access.
The correct me, if I'm wrong, but I thought like you know all be.
Regulatory changes that we're trying to make around you know q. I P. P and somebody on the reimbursement changes that all that kind of stuff got delayed somehow in.
You know or I mean are held up a within a within a in regards to voting on these things and if that is indeed the case how does one when you start to get.
More comfortable with the idea of DAYBREAK recovering if some of these items that I mean to help them improve profitability seems just kind of behind Gagnon legislation.
So the Texas quick program has been in place now for a number of years then what just took effect on.
September one was CWIP three it was not held up at all that revenue or is it was not coming in yet because it's not blade reimbursement, but it will come in to the first quarter of 2020, So I think what you're referring to more is Texas attempted to push through.
What I can now says one is called <unk> once thought of as a provider tax.
And it did not make it out of committee. So it was not voted on we did have high hopes, but certainly wasn't in.
Our planning and.
It's certainly not in our underwriting and.
I come back in a couple of years, but right now and it's it's not active.
Okay. That's helpful. And then Michigan again, just little indulge me one more time could just help me understand how with you on large tenant that exposed to that market, how they expect the changes to their Medicaid payments.
End up being somewhat neutral to them is.
I'm just I'm I don't think I quite understand how did it anyway. It's been end up in a negative impact again to the bottom line Oh, a neutral impact to their bottom line.
So number one I think it's just proposed legislation I unless something happens in the last 24 hours. It's it's not passed Yep correct and then and then secondly, I'm what do you have is.
The what being presented at the well is a reduction in the caps certain cost centers.
So you know our operator, there is going to have some facilities that are above the caps, which we'll get it.
Certain that are below the caps, which they'll be able to have a pick up on so.
Ultimately when they took all of their Michigan facilities and looked at the impact it was neutral.
Based upon what we know today and what's been proposed in the legislature or what the I should say what the governor is actually proposal.
[laughter] good I appreciate it thank you.
But.
Again, if you have a question. Please press Star then one.
[noise]. This concludes our question and answer session I would like to turn the conference back over to Taylor Pickett for any closing remarks. Please go ahead.
Oh, thanks, everyone for joining our call today as always we'll be available for any follow up you Matt. Thanks again.
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